Pound US Dollar Exchange Rate News: GBP/USD Struggles to Sustain $1.30 despite Rebound in UK Inflation

February 19, 2020 – Written by John Cameron

Pound (GBP) Falters in spite of Solid Increase in Inflation

The Pound (GBP) is trading on the back foot against the US Dollar (USD) and the majority of its other peers this morning, in spite of a stronger-than-expected UK consumer price index (CPI).

According to data published by the Office for National Statistics (ONS), UK inflation soared to 1.8% in January, a six-month high.

This was up from a three-year low of 1.3% in December and easily surpassed estimates for a more modest increase of 1.6%.

The ONS attributed the increase to a rise in fuel prices as well as robust energy prices after last year’s figures were distorted by the introduction of the energy price cap.

Mike Hardie, head of inflation at the ONS, said:

‘The rise in inflation is largely the result of higher prices at the pump and airfares falling by less than a year ago. In addition, gas and electricity prices were unchanged this month, but fell this time last year due to the introduction of the energy price cap.’

While this moves inflation closer to the Bank of England’s (BoE) target range of 2-3%, analysts suggest that last month’s increase is unlikely to have much bearing on the BoE’s outlook for monetary policy.

Ruth Gregory, senior UK economist at Capital Economics, comments:

‘While CPI inflation rose for the first time in six months, the inflation figures were in line with the Bank of England’s expectations, so they are unlikely to move the dial on the outlook for interest rates.

‘CPI inflation still looks likely to slip back to 1.5% within the next few months and remain below 2% for the rest of the year. But for the MPC, the fact that inflation is evolving in line with its projections provides another reason not to cut interest rates in the near term.’

The UK interest rate currently stands at 0.75%, with the BoE next scheduled to meet on 26 March for what will be Andrew Bailey’s first meeting as new Governor of the bank.

US Dollar (USD) Steady as Markets Brace for FOMC Minutes

At the same time the US Dollar (USD) is mostly rangebound this morning as USD investors await the release of the minutes from the Federal Reserve’s most recent policy meeting.

USD investors will hoping the minutes will shed some more light on the Federal Open Market Committee’s (FOMC) decision to keep interest rates on hold last month and whether the Fed appears open to more monetary easing.

Most analysts foresee the Fed implementing another rate cut by the end of 2020, with markets pricing in a cut by July.

However the real focus of the minutes is likely to be the bank’s assessment of the risks posed by the coronavirus outbreak, with the US Dollar likely to be knocked if it warns of a potential impact to the US economy.

GBP/USD Exchange Rate Forecast: Rebound in UK Retail Sales to Offer Support to Sterling?

Looking ahead, the Pound US Dollar (GBP/USD) exchange rate may look to climb back above $ 1.30 in the latter half of the week, with the publication of the UK’s latest retail sales figures on Thursday.

Economists forecast sales growth will have rebounded strongly at the start of 2020, rising by 0.7% in January after a 0.6% decline in December.

This will be the first increase in retail sales since July and is likely to bolster hopes that the UK economy will have returned to growth in the first quarter of 2020.

Meanwhile, with the coronavirus continuing to dominate headlines is likely we will see demand for the safe-haven US Dollar remain fairly robust through the latter half of the week.

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